RBI and govt relationship must be like a ‘Hindu family’ : Former BoE Governor

RBI should behave like a wife in a Hindu joint family, who does as she is told

RBI and govt relationship must be like a 'Hindu family' : Former BoE Governor

Mumbai.

Montagu Norman, Governor of the Bank of England from 1920 to 1944, said the Reserve Bank of India (RBI) has to be like a wife in a Hindu joint family, who advises but does exactly as she is told.

He bluntly said the relationship between the Bank of England and RBI must be like a ‘Hindoo marriage’, where the former is the dominant spouse and latter the subservient wife.

The RBI functioned under the Bank of England prior to independence.

Frictions between the central bank and the government are known to exist since its first governor Osborne Smith took charge from April 1935 to June 1937.

Norman’s views hold value today as in the past few weeks, the disagreements between the North Block and Mint Street has been the talk of the town.

Two speeches by RBI Deputy Governors — Viral Acharya and NS Vishwanathan — made a call to defend RBI’s autonomy and stance on its stringent capital and lending norms.

On several occasions since the Punjab National Bank (PNB) scam was unearthed in February, the government has blamed the banking regulator for lapses in the banks.

However, RBI Governor Urjit Patel in a public speech hit back at the government for not having enough power or control over public sector banks.

The RBI has also faced public criticism after the Narendra Modi-led government announced demonetisation on November 8, 2016, for mishandling its implementation.

In the last 4-5 speeches, RBI’s top management has vehemently expressed the need to protect its balance sheet, tighter prompt corrective action (PCA) norms, capital requirements and ensuring depositors’ interest over and above borrowers.

The central bank also placed in public a dissent note on the government’s proposal to set-up a separate payments regulator. Some of these issues on which the public cannot be expected to have an informed opinion, but may be required in public interest.

“Governments that don’t respect the independence of central banks will sooner or later incur the wrath of financial markets, ignite economic fire and come to rue the day they undermined an important regulatory institution,” Acharya said in his speech on October 26.

On behalf of the government, Subhash Chandra Garg, Secretary, Department of Economic Affairs at the Ministry of Finance, tweeted on November 2, a sarcastic comment following the positive reaction of the rupee, equity markets and oil prices, asking if it was the ‘wrath of the markets’.

However, the debate has made the market participants wonder if the government has used or will use the most-dreaded Section 7(1) of the Reserve Bank of India Act, 1934, which empowers the government to give directions to the central bank on matters of ‘public interest’.

While some argue that this always gives more power to the government, the RBI, by law, functions under the control of the government. Also, the government has always given directions to get its work done without using that Act per se.

The Centre has reportedly sent letters to Patel in recent weeks, exercising its powers under this section, on various issues like liquidity crunch in the NBFC sector, capital requirement for banks and lending to small and medium enterprises.

Reports have also indicated that Patel could step down as differences between the RBI and the government escalate.

The recent unceremonious removal of Nachiket Mor from RBI’s board and the surprise appointment of RSS ideologue S Gurumurthy to the board has already made the trust deficit between the two institutions more evident than before.>

Summary

Reviewer

https://www.clipper28.com/

Review Date

2018-11-05

Reviewed Item

RBI and govt relationship must be like a 'Hindu family' : Former BoE Governor

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